How Persistent Is the Occupation-Education Mismatch in Canada?

This paper investigates the duration of overqualification in Canada, the time-varying probability of leaving overqualification, and the wage consequences associated with the transition. The paper also applies a survival analysis approach to examine the impact of key driving factors on the probability of transitioning from overqualification to a job match using a proportional hazard (Cox) model. The analysis shows that within a 5-year period, an overqualified worker has a 22 percent probability of transitioning to an occupation that matches the education level. The probability of transition also decreases quickly over time, thus lowering the chances of finding a job match after 12 months. Regression analyses also provide evidence that overqualified workers with short tenure are more likely to transition than workers with medium to long tenure. Finally, job-related training nearly doubles the chance of transitioning out of overqualification. 1. Introduction It is well known that the level of education has significantly risen in Canada during the past few decades. Over the same period, we also observe a trend increase in the incidence of overqualified workers. Human capital investment is a key determinant of economic growth. However, not only do we need to invest in the supply of skills to help support growth, we also need to ensure that the skills of Canadian workers are used efficiently. Carr and Chen [1] found that about one in three Canadian workers were overqualified for their jobs in 2008. Also, according to the OECD [2], overqualified workers earn about 20 percent less on average than their matched counterparts in Canada. For an individual in a skills mismatch situation, overqualification may either be transitory, persistent, or permanent. In the case of a persistent or permanent mismatch situation, the cumulative loss in wages and productivity could become large and costly over time. Persistent overqualification also leads to skill obsolescence. While matched workers accumulate more human capital through experience, overeducated workers do not have the chance to use their skills and lose valuable work experience. This eventually leads to a depreciation of their human capital. Moreover, the persistence of overqualification inevitably reduces further the probability of finding an appropriate job that matches their skills set as firms use information on previous employment history in their hiring decisions. Although there is a wide literature on the incidence of skills mismatch, the issue of persistence has not been studied much. Among the few